Liberty Mutual Insurance Company v. Dearborn, City of
Filing
73
OPINION and ORDER Denying Liberty Mutual's Motion for Summary Judgment 54 and Granting in Part and Denying in Part City of Dearborn's Motion for Summary Judgment 41 . Signed by District Judge Nancy G. Edmunds. (JCur)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
Liberty Mutual Insurance Company,
Case No. 11-13605
Plaintiff,
Honorable Nancy G. Edmunds
v.
City of Dearborn,
Defendant.
/
OPINION AND ORDER DENYING LIBERTY MUTUAL’S MOTION FOR SUMMARY
JUDGMENT [54] AND GRANTING IN PART AND DENYING IN PART CITY OF
DEARBORN’S MOTION FOR SUMMARY JUDGMENT [41]
In 2004, the City of Dearborn entered into a contract with non-party Posen
Construction, Inc., to construct part of Dearborn’s combined sewer overflow (CSO) project.
Liberty Mutual Insurance, Co., issued a performance bond for the work that the contract
required.
The contract, Contract 2, required Posen to construct a caisson, a large cylindrical
container that collected and treated waste water runoff. The engineering firm Neyer, Tiseo
& Hindo, Ltd. (NTH), designed the caisson for Dearborn and acted as the engineer for the
entire CSO project.
Almost from the outset, problems surrounded the caisson’s
construction. In December, 2006, the caisson had an in-flow of water that allegedly
prohibited any major progress on the caisson. In 2009, Posen filed suit in state court
seeking money damages, additional time to complete the contract, and other relief. Posen
and Dearborn disputed the cause of the problems. In late 2010, Posen and Dearborn
accepted a case evaluation award. Dearborn paid Posen $600,000.00. Despite resolving
the Posen litigation, Posen did not return to work on the caisson.
In 2011, with very little progress having been made on the caisson, Dearborn
“declared” a default under the performance bond and notified Liberty that it was declaring
a contractor default.
Following the declaration of default, Liberty filed suit seeking a declaratory judgment
that it is not liable under the performance bond. (Dkt. 3, Am. Compl.) Liberty alleges seven
counts in its amended complaint as to why it is not liable for a breach of the policy:
discharge by impairment; discharge by modification; contractual period of limitations; waiver
of right to terminate; abandonment of contract; and impossibility of performance. (Id.)
On October 14, 2011, Dearborn filed its amended counterclaim. (Dkt. 11, Am.
Countercl.) With its amended counterclaim, Dearborn seeks a declaratory judgment that
Liberty is liable under the performance bond and that Liberty must (1) perform the
remaining work on Contract 2 (either by itself, its agents, or an independent contractor), or
(2) pay Dearborn the amount required to complete Contract 2. (Id. at 8.) Dearborn also
asserts counts for breach of contract and unfair trade practices act violations. (Id. at 9-10.)
Dearborn has filed a motion for summary judgment on Liberty’s claims. (Dkt. 41.)
Liberty has filed a motion for summary judgment on Dearborn’s counterclaim. (Dkt. 54.)
The Court addresses Liberty’s motion first, for Liberty argues that the doctrines of res
judicata and/or issue/claim preclusion or the performance bond’s contractual period of
limitations bar Dearborn’s suit. If Liberty were to succeed on these claims, Dearborn’s
motion would be moot. Because the Court finds, though, that res judicata does not bar this
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suit and disputed issues of fact exist as to when the performance bond’s contractual period
of limitations began to toll, the Court DENIES Liberty’s motion for summary judgment.
The Court therefore addresses Dearborn’s motion for summary judgment. Dearborn
requests a declaratory judgment that Liberty owes on the bond.
Dearborn also
substantively attacks Liberty’s arguments as to why Liberty does not owe on the
performance bond. The Court GRANTS in PART and DENIES in PART Dearborn’s
motions. The Court DENIES Dearborn’s request for a declaratory judgment because the
Court finds that, viewing the facts in a light most favorable to Liberty, genuine issues of fact
exist as to whether Liberty can assert that the performance bond should be discharged by
impairment, modification, and/or abandonment. As to the waiver argument, the Court
DENIES Dearborn’s motion for summary judgment, for the Court finds that the waiver
argument parallels the abandonment argument. As to the impossibility argument, the Court
GRANTS Dearborn’s motion, because the Court finds that there is uncontested evidence
that a contractor could complete the caisson as contemplated by Contract 2 and because
Liberty’s arguments are not well-supported. The Court finally DENIES Dearborn’s motion
as to damages because issues of fact exist as to what damages, if any, Dearborn would
be entitled.
I.
Facts
A. Dearborn’s Combined Sewer Overflow Basis of Design; Dearborn awards
Contract 2 to Posen, Liberty issues a performance bond for Contract 2
In 1999, Dearborn retained Neyer, Tiseo & Hindo, Ltd. (NTH), to prepare a basis of
design (BOD) for a combined sewer overflow (CSO) project so that the city’s storm water
and water system would comply with federal and state discharge standards. (Dearborn’s
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Mot. for Summ. J. at 2.) NTH submitted a BOD on Dearborn’s behalf. (Id.) NTH was the
engineer and Dearborn’s representative on the CSO project. (Liberty’s Mot. for Summ. J.
at 2, Ex. A, Dearborn-Posen Contract at 1.) The Michigan Department of Environmental
Quality (MDEQ) issued the required National Pollutant Discharge Elimination (NPDES)
permit to construct the CSO project. (Dearborn’s Mot. at 1.) In accordance with the BOD,
the CSO project would have presumptively met water quality standards.
Dearborn divided the BOD for the CSO into several contracts. Dearborn bid out
Contract 2, and awarded the contract to Posen Construction, Inc. (Dearborn’s Mot. at 3.)
Contract 2 called for the construction of large, 116 feet in diameter, “capture shaft”/caisson,
that would contain and “in some instances treat[] wastewater that would have otherwise
overflowed into the Rouge River.” (Id. at 1; Liberty’s Mot. for Summ. J. at 2.)
On November, 2004, Posen and Dearborn finalized Contract 2. (Dearborn-Posen
Contract at 7.) Contract 2 listed several benchmark completion dates. (Id. at 1.) By April
1, 2007, Posen was to have substantially completed the caisson. (Id.) By May 1, 2007,
Posen was to have completed the caisson. (Id.)
On October 26, 2004, Posen, Dearborn, and Liberty entered into the performance
bond. (Am. Compl., Ex. A, Performance Bond.) The performance bond’s amount was for
$28,895,048.00. (Id.)
Liberty became liable under the performance bond, so long as Dearborn was not in
default, when
[Dearborn] has notified [Posen] and [Liberty] . . . that [Dearborn] is
considering declaring a Contractor Default and has requested and attempted
to arrange a conference with [Posen] and [Liberty] to be held not later than
15 days after receipt of such notice to discuss methods of performing the
Contract. If [Dearborn], [Posen] and [Liberty] agree, [Liberty] shall be allowed
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a reasonable time to perform the Contract, but such an agreement shall not
waive [Dearborn’s] right, if any, subsequently to declare a Contractor
Default[.]
(Performance Bond, ¶ 3.1.) Liberty would also be liable under the performance bond when
[Dearborn] has declared a Contractor Default and formally terminated
[Posen’s] right to complete the Contract. Such Contractor Default shall not
be declared earlier than 20 days after [Posen] and [Liberty] have received
notice as provided in Paragraph 3.1[.]
(Id. ¶ 3.2.) To recover under Paragraph 3, Dearborn also had to first pay the remainder of
the contract’s price to Liberty or another contractor. (Id. ¶ 3.3.)
Paragraph 4 lays out Liberty’s duties when Dearborn satisfies Paragraph 3.
(Performance Bond, ¶ 4.) Paragraph 4:
When [Dearborn] has satisfied the conditions of Paragraph 3, [Liberty] shall
promptly and at [Liberty’s] expense take one of the following actions:
4.1. Arrange for [Posen,] with Consent of [Dearborn,] to perform and
complete the Contract; or
4.2. Undertake to perform and complete the Contract itself, through its
agents or through independent contractors; or
4.3. Obtain bids or negotiated proposals from qualified contractors
acceptable to [Dearborn] for a contract for performance and completion
of the Contract, arrange for a contract to be prepared for execution by
[Dearborn] and Contractor selected with [Dearborn’s concurrence], to
be secured with performance and payment bonds executed by a
qualified surety equivalent to the bonds issued on the Contract, and pay
to [Dearborn] the amount of damages as described in Paragraph 6 in
excess of the Balance or the Contract Price incurred by [Dearborn]
resulting from [Posen’s] Default; or
4.4. Waive its right to perform and complete, arrange for completion, or
obtain a new contractor and with reasonable promptness under the
circumstances:
1. After investigation, determine the amount for which it may be liable to
[Dearborn] and, as soon as practicable after the amount is determined,
tender payment therefor to [Dearborn]; or
2. Deny liability in whole or in part and notify [Dearborn] citing reasons
therefor.
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5.
If [Liberty] does not proceed as provided in Paragraph 4 with
reasonable promptness, [Liberty] shall be deemed to be in default on
this Bond 15 days after receipt of an additional written notice from
[Dearborn] to [Liberty] demanding that [Liberty] perform its obligations
under this Bond, and [Dearborn] shall be entitled to enforce any remedy
available to [Dearborn.] If [Liberty] proceeds as provided in Paragraph
4.4, and [Dearborn] refuses the payment tendered or [Liberty] has
denied liability, in whole or in part, without further notice [Dearborn] shall
be entitled to enforce any remedy available to [Dearborn.]
Contract 2 defines “contractor default” and “owner default”:
Contractor Default: Failure of [Posen], which has neither been remedied nor
waived, to perform or otherwise to comply with the terms of the Contract.
(Performance Bond ¶ 12.3.)
Owner Default: Failure of [Dearborn,] which has neither been remedied nor
waived, to pay [Posen] as required by the Contract or to perform and
complete or comply with the other terms thereof.
(Performance Bond ¶ 12.4.)
The performance bond requires any suit under the bond to “be instituted within two
years after Contractor Default or within two years after Contractor ceased working or within
two years after Surety refuses or fails to performs its obligations under this Bond,
whichever occurs first.” (Performance Bond ¶ 9.)
B. Posen begins construction on Contract 2's caisson, the parties experience
problems sinking the caisson, Dearborn and Posen sign a change order in
2008, Dearborn and Liberty’s offered views why the caisson construction
experienced problems
In September, 2004, Posen began constructing the caisson. (Dearborn’s Mot., Ex.
1, September 24, 2010 Contract 2 Independent Engineering Assessment of Caisson
Construction Issues).
Dearborn explains what the caisson is and states that Posen was supposed to use a
specific means to sink the caisson:
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Described in basic terms, the [c]aisson is a massive underground, concrete
cylinder designed to capture excess storm and sewer water. The [c]aisson
was to be constructed using the “sinking caisson” method. Pursuant to this
method, the [c]aisson is sunk into the ground using its own weight as the
driving force, combined with the contractor reducing or eliminating the three
forces that resist against the [c]aisson sinking (i.e., frictional resistance on the
outside and inside faces of the [c]aisson caused by the soil in contact with
the [c]aisson, and the end bearing resistence of the soil under the bottom
portion of the [c]aisson). Under this method of construction, the [c]aisson is
constructed in stages. Consecutive rings of concrete comprising the
[c]aisson are poured and the weight of the [c]aisson (combined with the
reduction of resistant forces) drives it into the ground. After the [c]aisson has
sunk to an appropriate depth, a new ring (or “lift”) is added and the process
of sinking begins again. This process is repeated until the [c]aisson reaches
its intended depth, which in this case was bedrock.
(Dearborn’s Mot. at 3, n. 3.)
Dearborn explains that, while it permitted Posen much leeway in the caisson
construction, Contract 2 mandated Posen to sink the caisson “in the wet,” meaning that,
once the caisson reached a specific depth, “it must [have been] allowed to fill with the water
that naturally occurred in the ground.” (Dearborn’s Mot. at 3.) Dearborn further explains
that the “purpose of this head of water was to mitigate against the soil ‘piping’ from the
exterior of the [c]aisson under the bottom of the [c]aisson and into the interior of the
[c]aisson.” (Id. at 3-4.)
The caisson construction did not go as planned. (Dearborn’s Mot., Ex. 1, September
24, 2010 Contract 2 Independent Engineering Assessment of Caisson Construction Issues;
Liberty’s Mot. at 4.) The caisson experienced several in-flows, or “blow-ins,” of soil and
water in 2006, including a major blow-in in December, 2006, “after the caisson was seated
on rock, but prior to the start of caisson underpinning operations and rock excavation within
the shaft.” (Id. at 1; Id. at 4.) After the December 2006 blow-in, “the caisson was flooded
to prevent further ground loss into the shaft.” (Id.; Id.)
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Liberty and Dearborn dispute the reasons why the caisson construction experienced
problems.
Dearborn alleges that Posen deviated from the original plans by attempting to sink the
caisson “in the dry.” (Dearborn Mot. at 4.) Dearborn further alleges that NTH never ratified
Posen’s altered plan and that NTH reserved the right to require Posen to sink the caisson
with the required head of water if NTH deemed that process necessary. (Id. Exs. 4, 5.)
Dearborn claims that Posen “repeatedly ignored NTH’s warning, admonitions, and
instructions regarding increasing the level of water in the [c]aisson when warning signs of
ground-loss manifested.” (Id., Exs. 6, 7, 8.) Dearborn states that Posen’s failure to follow
NTH’s recommendations and warnings resulted in the blow-ins and significant damage to
the infrastructure. (Id.)
Dearborn states that, when Posen followed the contract and wet-sank the caisson, the
caisson finally reached bedrock, as the contract required. (Dearborn’s Mot. at 4.) After
reaching bedrock, Dearborn says that the contract required Posen to remove bedrock
underneath the caisson to increase the storage capacity. (Id.) Dearborn states that the
contract required Posen to stabilize the soil around the caisson and to choose the means
by which to stabilize the soil. (Id. at 4, 5, Ex. 9.) Dearborn maintains that Posen chose jet
grouting, and experienced many problems with the jet grouting, which led to the December
2006 blow-in. (Id. at 5.)
After the December 2006 blow-in, Dearborn states that it, Posen, and NTH engaged
in discussions and workshops about how to continue the caisson construction. (Dearborn
Mot. at 6.) Dearborn maintains that the discussions resulted in Change Order No. 6, and
Dearborn advancing Posen roughly $2,000,000.00 to continue dewatering of the caisson.
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(Id., Ex. 10, Change Order No. 6.) The parties executed Change Order No. 6 on June 13,
2008. Dearborn states that Posen did not dewater the caisson to the point where it
believed it could continue work on the caisson. (Id., citing Ex. 11, Posen’s monthly
progress payments indicating work conducted through September 15, 2008.) Dearborn
explains that, in late 2008, Posen ceased worked on the dewatering project and that Posen
did not undertake any significant work on the caisson. (Id.)
Liberty characterizes the events that surround the caisson differently. (Liberty’s Resp.
at 3.) Liberty maintains that Dearborn and NTH’s caisson designs caused the blow-ins and
the suspended work. (Id. at 3-4.)
Liberty first points to their geotechnical consultant’s report. (Liberty’s Resp. at 3-4.)
Ronald E. Heuer, a geotechnical consultant, conducted a study, made findings, and issued
a report as to the causes of the blow-ins. (Liberty’s Resp., Ex. A, Heuer October 26, 2007
interpretation of blow-ins report.) Heuer concluded that the cause of the blow-ins was the
“incomplete sealing of the upper bedrock by the methods specified in [] Contract [2].” (Id.)
Heuer continued, “[t]he fundamental underlying cause behind all of the factors is that, for
the detailed geologic conditions actually present at this site, the basic Contract design and
specifications did not ensure a complete seal of the lower soil, the soil/rock contract, and
particularly the upper fractured bedrock.” (Id.) In his report, Heuer counters Dearborn’s
various arguments as to why Posen was at fault for the blow-ins. (Id.)
Heuer also issued a report in September, 2010.
(Liberty’s Resp., Ex. A, Heuer
September 21, 2010 interpretation of blow-ins report.) In this report, he confirmed his belief
as to the cause of the blow-ins. (Id.) He characterized the cause as a “mismatch”
“because the actual geologic conditions encountered were different from the conditions
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[NTH] had interpreted from [Contract 2] boring data and had expected based upon local
experience[.]” (Id.) He further characterized the problems encountered as a differing site
condition. (Id.)
Liberty next disagrees with Dearborn’s statement that Dearborn/NTH did not approve
of sinking the caisson “in the dry” and that sinking in the dry was not successful. (Liberty’s
Resp. at 4.) Liberty does show that NTH knew of Posen’s sinking the caisson in the dry.
Gilbert testified that NTH did not sink the caisson in the wet. (Liberty’s Mot., Ex. D, Larry
Gilbert Dep. at 61.) He stated,
Posen envisioned and actually proceeded with an alternative method that
involved construction of a cutoff wall that isolated the interior of the caisson
construction, or the caisson itself from the surrounding soil and water in the
soil, that they believed would allow them to de-water the interior of the
caisson, dry conditions, and proceed with construction without the balancing
head of water with this surrounding cutoff wall providing the protection for
their excavation.
(Ex. D, Larry Gilbert Dep. at 62.)
Liberty asserts that Posen successfully sank the caisson “in the dry,” but the language
cited that Liberty argues supports that assertion does not support that position. (Liberty’s
Resp. at 4, citing Liberty’s Mot., Ex. O, Murray Dep. at 14, in which Murray states that the
caisson reached bedrock, but in which Murray does not state by which method the caisson
reached bedrock.).
Liberty also contests Dearborn’s characterization of the events surrounding the
dewatering and Change Order No. 6. (Liberty’s Resp. at 5-6.) Liberty states that the
dewatering and the change order did not serve the sole purpose of advancing the project.
(Id. at 5.) Liberty suggests that Change Order No. 6 served also to substantiate Posen’s
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position regarding the cause of the blow-ins and to determine whether different site
conditions existed. (Liberty’s Resp. at 5, Liberty’s Mot., Ex. J, Murray Dep. at 73, 53.)
Liberty maintains that Change Order No. 6 “was not a magnanimous gesture reflecting
compromise and commitment to completing the Project[.]” (Liberty’s Resp. at 5.) Liberty
explains that, if Posen’s claims turned out to be valid, the two million dollars would be
added to Contract 2, but if the claims were not valid, then Dearborn would take the two
million from Posen’s retainer. (Id. at 5-6, Liberty’s Mot., Ex. J., Murray Dep. at 43-44.)
Liberty also states that the parties disputed how much dewatering of the caisson was
necessary to continue work on the caisson. (Liberty Resp. at 6, Liberty’s Mot., Ex. J,
Murray Dep. at 54.)
And finally, relating to the dewatering, Liberty offers that Posen raised safety concerns
related to the dewatering–that Posen refused to continue dewatering because it believed
more dewatering without additional wells would put its employees at risk. (Liberty’s Resp.,
Ex. B, Zapczynski Aff. ¶ 3.)
C. Posen files suit against Dearborn to resolve issues surrounding Contract 2
In February, 2009, Posen filed suit against Dearborn in Michigan state court.
(Dearborn’s Mot. for Summ. J., Ex. 12, Posen Compl.) In its complaint, Posen stated that
its suit arose of out the Contract 2 project and that Posen sought “to remedy acts/omissions
by [Dearborn] that require adjustments of Contract Price/Time and/or constitute breaches
of [Dearborn’s] contract with Posen.” (Posen Compl. ¶ 6.) Posen added that it filed suit
because of “additional contract costs/damages suffered by Posen as a result of the
changed work on the Project including, but not limited to, numerous changes ordered by
[Dearborn] to perform additional work; [Dearborn’s] issuance of defective/erroneous plans,
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specifications, drawings, geotechnical and design information; differing site conditions; as
well as [Dearborn causing] suspensions and delays to the Project Schedule.” (Id.)
In that complaint, Posen stated, “[t]o date and throughout the course of the Project
work (which is still ongoing) Posen has encountered excusable delays caused by or
attributable to [Dearborn.]” (Posen Compl. ¶ 17.) “Based only on delays experienced
through January 2009, Posen is entitled under the Contract to a time extension well in
excess of 1000 calendar days.” (Id. ¶ 17.) Posen alleged that it could not determine an
accurate Contract 2 completion date due to the allegedly excusable delay that Dearborn
caused. (Id.) Posen also alleged that “[a]s a direct result of [Dearborn’s] actions and
inactions, the nature and extent of performance required of Posen has been radically
different than contemplated by the Parties at the time of contracting.” (Id. ¶ 18.)
Posen alleged breach of contract, breach of contract–warranty specifications, breach
of contract–differing site conditions, breach of contract–delay, and quantum meruit. Posen
sought money damages, “[a]dditional relief to which Posen is entitled under the Contract,
including but not limited to an extension of the Contract Time,” and other relief. (Posen
Compl. at 25.)
In April, 2009, Dearborn filed a third-party complaint against NTH in the Posen
Litigation. (Liberty’s Mot., Ex. L, NTH Compl.) In the third-party complaint, Dearborn
acknowledged the Posen complaint and the allegations against Dearborn. Dearborn
alleged that it filed its complaint against NTH alleging that if Dearborn was liable to Posen,
then NTH would be liable to Dearborn for the alleged design errors or inaccuracies. (NTH
Compl. ¶ 16.)
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D. The engineering firm CDM becomes involved, Dearborn moves forward with
the intent to have CDM replace NTH, CDM prepares a revised BOD
In December, 2008, Murray, Dearborn’s representative who was in charge of the CSO
project, reached out to Carl Johnson, an engineer with the engineering firm CDM Smith.
(Liberty’s Resp., Ex. H, Carl Johnson Dep. at 13-14.) Johnson stated that Murray had been
frustrated with the CSO project and sought Johnson’s advice. (Id. at 14.) In the summer
of 2009, the engineering firm, CDM, became involved with the CSO project generally, and
the Contract 2 caisson specifically. (Id. at 8.) Johnston stated that Dearborn sent out a
request for proposals (RFP) seeking architectural design and analysis services dealing with
the CSO project. (Id. at 23.) Johnson explained that CDM’s objective in responding to the
RFP was to help Dearborn deal with a looming MDEQ/NPDES permit deadline by looking
at the CSO’s current BOD. (Id. at 24.) Johnson stated that Dearborn was looking whether
there could be a revised BOD for the CSO. (Id. at 25.) Johnson stated that CDM
submitted its proposal on June 10, 2009; he added that Dearborn chose CDM’s proposal
on June 23, 2009. (Id. at 27-28.)
The proposal that CDM submitted, and Dearborn chose, took a “demonstrative
approach” to resolving/finishing the CSO project.
(Johnson Dep. at 34.)
Johnson
explained that CDM suggested that Dearborn construct the CSO project, and Contract 2's
caisson, to a smaller volume than the original BOD called for. (Id.) Given that CDM
proposed that the CSO project have a smaller volume, and therefore a smaller facility, in
order to comply with MDEQ water quality standards and receive a NPDES permit,
Dearborn would have to ‘demonstrate,’ or prove, that the new design would result in the
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proper water quality standards. (Id.) CDM performed the study specifically on three
caissons, 2, 3, and 5. (Id. at 35.)
Johnson testified that CDM submitted a revised BOD based on this demonstrative
approach and that Dearborn ultimately introduced this revised BOD to MDEQ. (Johnson
Dep. at 36.) Johnson stated that, in July, 2009, before the revised BOD, CDM met with
Dearborn and MDEQ and with NTH to discuss a reevaluation of the current BOD. (Id. at
44.) Johnson stated that CDM suggested various alternatives to the current BOD–sewer
separation, retention treatment basins, and a possible hybrid between the presumptive
approach (the current BOD) and the demonstrative approach. (Id. at 45.)
Concerning Contract 2's caisson, Johnson explained that CDM looked at three
alternatives. (Johnson Dep. at 45.) The first alternative was to dewater and finish the
caisson as originally contemplated. (Id.) The second was, if MDEQ approved of the
reduced capacity caisson, to shorten the caisson’s shaft and install a tremie concrete plug
without dewatering the site. (Id. at 46.) And the third option was to coordinate Contract 3's
caisson’s discharge with Contract 2's caisson. (Id.)
Johnson stated that the second alternative “became acceptable to MDEQ.” (Johnson
Dep. at 48, 60.) Johnson explained that CDM, MDEQ, and Dearborn met several times in
the fall of 2009 regarding the best way to deal with the current problems surrounding the
caisson and how to move ahead. CDM then prepared a revised BOD to submit to MDEQ
in order to secure a new NDPES permit. (Id. at 69.) The revised BOD suggested that
Dearborn proceed with the caisson in accordance with the second alternative–finishing the
caisson at its current depth and constructing a tremie slab. (Id. at 84.)
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Despite continued design specification discussion throughout the end of 2009 and
beginning of 2010, and continual discussions about possible completion dates, and
discussions about handing off the project from NTH to CDM, Johnson testified that Murray
never gave CDM notice to move forward on the revised BOD, save for “some very minor
things.” (Johnson Dep. at 105.) Johnston also testified that Murray never enacted the
discussed handoff of duties from NTH to CDM. (Id. at 108.) Johnson reiterated that
Dearborn did not tell CDM to proceed on Contract 2, save for minor things; one of the minor
things Dearborn asked CDM to do was to investigate how to construct the tremie slab. (Id.
at 122.)
E. Dearborn and Liberty dispute the purpose of the revised BOD and how much
of the revised BOD Dearborn proceeded with
Murray, Dearborn’s designee in this case, stated that, during the 2009 state lawsuit,
Dearborn submitted a revised basis of design (revised BOD) to the MDEQ for Dearborn’s
entire caisson project. (Dearborn’s Mot. for Summ. J., Ex. 18, Murray Aff. ¶ 2.) Murray
explained that Dearborn had “numerous reasons” for submitting the revised BOD, including
the issues Dearborn was having with the caisson projects, including Contract 2. (Id. ¶ 3.)
Murray also explained that the revised BOD “explored the possibility of redesigns of, or
modifications to, [the caisson projects] to determine if there was a less expensive means
of completing the projects for the purposes of settlement negotiations with the contractors.”
(Id. ¶ 4.) Murray stated that Dearborn believed that, if a less expensive means of finishing
the caissons existed, there would be “an increased likelihood” that the parties could resolve
the state litigation. (Id. ¶ 5.)
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Murray stated that another of the revised BOD’s purposes was to move away from
caisson construction and instead to use sewer separation. (Murray Aff. ¶ 6.) Given that
purpose, Murray maintained that Dearborn needed to know whether MDEQ would approve
an altered project. (Id. ¶ 8.) After submitting the revised BOD, Murray stated that Dearborn
applied to MDEQ for a new NPDES permit for the concepts in the revised BOD. (Id. ¶ 9.)
Murray explained that the revised BOD set forth one option with respect to the thencurrent problems with the caisson. (Murray Aff. ¶ 10.) He stated that the revised BOD
suggested that Dearborn/Posen complete the caisson at its existing depth, without going
deeper into the rock. (Id. ¶ 10.) Finishing the project at that depth, Murray said, would
have rendered the entire project less expensive and “would also serve to eliminate the
problem that Posen was experiencing in completing the [c]aisson.” (Id. ¶¶10-12.) But
Murray offered that, if the parties modified the contract/caisson, issues could arise as to
whether the caisson met water quality standards. (Id. ¶¶ 12-14.)
Murray maintained that, during the 2009 litigation, Dearborn and Posen engaged in
settlement negotiations “based on the concept of the [c]aisson being completed to a
smaller capacity,” but the parties did not resolve their issues. (Murray Aff. ¶ 16.) After the
2009 litigation, Murray stated that Dearborn and Posen “resumed discussions regarding
Posen completing the [c]aisson to the lower capacity as stated in the Revised BOD.” (Id.
¶ 18.)
Murray explained that Dearborn never informed Posen that Dearborn “was waiving
the requirement that Posen complete the [c]aisson to its contracted design depth or that
Posen did not have to complete the work required by Contract [2].” (Murray Aff. ¶ 19.)
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Murray added that Dearborn never ordered Posen to construct anything other than what
Contract 2 required and never approved a change to that contract. (Id. ¶ 20.)
Liberty also characterizes Dearborn’s request for a revised BOD differently. (Liberty’s
Resp. at 6-7.) Liberty states that Dearborn never told Posen that the reason for the revised
BOD was to advance the resolution of the litigation. (Id., Zapczynski Aff. ¶ 4.) Liberty
maintains that Dearborn told Posen that the new design was because the engineers were
concerned with issues related to lowering the water level. (Id. at 7, Zapczynski Aff. ¶ 4.)
Liberty states that the true purpose of the revised BOD was to provide a cheaper and
easier-to-build alternative to the caisson. (Liberty’s Mot. at 7, Ex. O, Murray Dep. at 158
(Murray stating that Dearborn’s position was that Posen unreasonably stopped working on
the caisson even when Dearborn “had moved to provide a solution that might be cheaper
and easier to build[.]”)). Liberty also argues that Murray testified that the revised BOD
would provide “construction” and “operational” savings. (Liberty’s Mot., Ex. J, Murray Dep.
at 111 (Murray stating that, while giving an update to the mayor about the project and the
various options Dearborn had to deal with the caisson’s troubles, and how to proceed, he
wanted to err on the side of maximum exposure, and explaining that option 2, the revised
BOD, would provide operational and construction savings.)). And Liberty states that the
revised BOD would cost approximately five million dollars less than the original BOD.
(Liberty’s Mot. at 7, citing Revised Basis of Design Report, Dearborn’s Mot., Ex. 17.)
Liberty states that significant evidence exists that Dearborn was going to abandon Contract
2's original design. (Liberty Resp. at 8.) Liberty points to an NTH consultant’s testimony
and the then-current Dearborn mayor’s testimony.
17
Larry Gilbert was a consultant with NTH. Liberty puts forth statements that Gilbert
made that support the argument that Dearborn was looking to abandon Contract 2 as
contemplated. (Liberty’s Resp. at 8-9.) Gilbert stated, as Liberty points out, that he
believed that Dearborn had “alternative plans in mind’ regarding the caisson. (Liberty’s
Mot., Ex. Y, Gilbert Dep. at 276-77.) Gilbert also stated, as Liberty points out, that upon
seeing the revised BOD at the deposition, that it “certainly would raise questions in my mind
as to what is the ultimate intent here, and in fact, is there a likely change or necessary
change to Contract 2.” (Ex. Y, Gilbert Dep. at 249-50.)
Liberty also points to Dearborn Mayor John B. O’Reilly’s letter to the MDEQ as
support for its position that Dearborn had abandoned Contract 2. (Liberty’s Resp., Ex. C,
O’Reilly letter.) In this letter, Mayor O’Reilly stated that the entire CSO “cannot be
constructed or completed within the basis of design proposed in 2002.” (Id.) He also
stated that, in March, 2009, he “halted any new CSO Caisson construction and began a
complete re-evaluation of the entire CSO program e.g. Basis of Design, the managerial
oversight and control procedures, a forensics analysis of the two projects that had failed
during construction and the personnel assigned to the project.” (Id.) (emphasis added.)
Liberty further points to a Dearborn newspaper clipping in which Murray stated,
posturing about possibilities, that Contract 2 would stop at the bedrock, which, Liberty
argues, is consistent with the revised BOD, not Contract 2 as originally contemplated.
(Liberty’s Resp. at 9, Ex. D.)
And Liberty cites to two NTH letters in which NTH engineers take the position that
Dearborn intended to adopt the revised BOD and proceed with construction under that
design. (Liberty’s Resp. at 9-10, Exs. E, F.)
18
Liberty also points out that Mayor O’Reilly stated that, as early as 2009, Dearborn had
hired CDM to get a new permit from MDEQ to go forward with the revised BOD, which
included securing a permit for the revised BOD. (Liberty’s Resp. at 10, Liberty’s Mot., Ex.
X, O’Reilly Dep. at 30; Liberty’s Resp., Ex. H., CDM Dep. at 168.)
F. Dearborn, Posen, and Liberty enter into a standstill and tolling agreement
while the state litigation was pending, Dearborn and Posen accept a case
evaluation award
During the Posen litigation, on August 12, 2010, Dearborn, Posen, and Liberty entered
into a Standstill and Tolling Agreement. (Dearborn’s Mot., Ex. 14, Tolling Agreement.) In
the agreement, Dearborn indicated that it had approached Posen and indicated that it was
considering terminating Contract 2 and pursuing claims against both Posen and Liberty
“arising from Posen’s alleged default in performing work under the Contract.” (Id. at 1.)
The agreement shows that Dearborn and Posen found it in their best interests to enter into
the tolling agreement with respect to Dearborn’s “potential claim under the Contract rather
than terminating Posen’s Contract at this time[.]” (Id.) Liberty expressed that it “desire[d]
to investigate [Dearborn’s] potential claim under the [Performance Bond] if said claim is
asserted to assess its responsibility under the Bond[.]” (Id.) The parties mutually agreed
that Dearborn would not file any lawsuit against Liberty or terminate Posen’s contract
during the tolling period. (Id.) The tolling period ran from August 12, 2010 to July 31, 2011,
or shorter, if the parties mutually agreed. (Id. at 1-2.) The parties expressed that the tolling
period would not “be included in the calculation or application of any statute of limitations
or repose defense, or the limitations period as stated in Paragraph 9 of the Bond . . . or
under the Contract, which may be applicable to any cause of action related to the Bond or
the Contract which may be brought by [Dearborn] against Liberty or Posen, and the parties
19
agree that the applicable statute of limitations period, Bond Limitation Period, and/or
contractual limitations period shall be extended for a time period equal to the Tolling
Period.” (Id. at 1-2.) The parties also stated that the agreement did not “revive any claims,
right, obligations, or defenses that were waived or expired before July 15, 2010.” (Id. at 2.)
On March 2, 2011, Dearborn and Posen accepted a case evaluation recommendation
in the Posen litigation. (Liberty’s Mot., Ex V, Case Evaluation Award.) The recommendation
required Dearborn to pay $600,000.00 to Posen. (Id.) And the recommendation required
NTH to pay Dearborn $200,000.00. (Id.)
G. Dearborn considers declaring Posen in default, the state case is
dismissed, the correspondence between Dearborn and Liberty
On June 30, 2011, Dearborn notified Liberty that it was “considering declaring a
Contractor Default as a result of [Posen’s] failure to complete the work required by
[Contract 2.]” (Am. Compl., Ex. B, June 30, 2011 letter.) Dearborn requested that Liberty
meet with it and Posen, in accordance with the Performance Bond’s Paragraph 3.1. (Id.)
Dearborn also stated that the letter and conference-request “is not a notice of terminating
the Standstill and Tolling Agreement among [Dearborn,] Posen, and Liberty[.]” (Id.)
On July 6, 2011, the Wayne County Circuit Court dismissed the case with prejudice
pursuant to the case evaluation. (Liberty’s Mot. for Summ. J., Ex W, Case Evaluation
Award.) The order states that the “dismissal shall be deemed to dispose of all claims in the
action and includes all fees, costs, and interest to the date this Order is entered.” (Id.)
On July 14, 2011, Liberty responded to Dearborn’s June 30 letter. (Am. Compl., Ex.
C, July 14, 2011 letter.) Liberty acknowledged the date and time for the Paragraph 3.1
20
conference, set for July 20, 2011. (Id.) Liberty also requested that Dearborn “enumerate
and describe,” Posen’s alleged failures that Dearborn maintains constitutes Contractor
Default. (Id.)
Five days later, Dearborn responded. (Am. Compl., Ex. D, July 19, 2011 letter.)
Dearborn outlined the facts it found supported Posen’s contractor default. (Id.) Dearborn
described entering into Contract 2 with Posen and the problems Posen had with the
caisson. (Id.) Dearborn recounted the 2009 litigation against Posen. (Id.) Dearborn
concluded
[t]he basis for [Dearborn] declaring a contractor default and for terminating
Posen’s right to complete the contract is very simply–Posen is in gross
violation of the time requirements for completing its work and for its refusal
to complete the work it contracted to perform. The project has sat dormant
for years with Posen refusing to perform its contractual duties. As such,
Posen has given [Dearborn] no choice but to assert its rights under Liberty[‘s]
performance bond.
(Id.)
On July 27, 2011, the parties executed a first amendment to the standstill and tolling
agreement.
(Dearborn’s Mot. for Summ. J., Ex. 22, First Amendment to Tolling
Agreement.) The parties agreed to extend the tolling period from July 31, 2011 to August
22, 2011. (Id.)
On August 17, 2011, Dearborn informed Posen that it was formally terminating
Posen’s contract. (Am. Compl., Ex. E, August 17, 2011 Posen termination.)
On August 18, 2011, Liberty initiated this case by filing its complaint seeking a
declaratory judgment.
II.
Rule 56 motion for summary judgment standard
21
It is well established that summary judgment under Federal Rule of Civil Procedure
56 is proper when the movant "shows that there is no genuine dispute as to any material
fact, and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a);
U.S. SEC v. Sierra Brokerage Services, Inc., 712 F.3d 321, 326-27 (6th Cir. 2013) (citing
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251–52 (1986)) (quotations omitted). When
reviewing the record, "the court must view the evidence in the light most favorable to the
non-moving party and draw all reasonable inferences in its favor." Id. Furthermore, the
"substantive law will identify which facts are material, and summary judgment will not lie if
the dispute about a material fact is 'genuine,' that is, if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party." Id.
When considering the material facts on the record, a court must bear in mind that
“[t]he mere existence of a scintilla of evidence in support of the plaintiff's position will be
insufficient; there must be evidence on which the jury could reasonably find for the plaintiff.”
Anderson, 477 U.S. at 252.
III.
Analysis
A. The Court denies Liberty’s motion for summary judgment, because, viewing
the facts in a light most favorable to Dearborn, the Michigan court case
between Dearborn and Posen does not preclude this lawsuit and because
there is an issue of material fact as to when the contractual period of
limitations began
Liberty asserts two reasons why Dearborn cannot succeed on its counterclaims.
Liberty first alleges that res judicata precludes Dearborn from litigating this case’s issues,
as Dearborn could have raised the issues in the Posen litigation. (Liberty’s Mot. for Summ.
22
J. at 12.) Liberty then argues that the performance bond’s contractual period of limitations
has expired and that Dearborn also cannot assert its claims on that ground. (Id. at 18.)
1. Res judicata/claim preclusion does not bar this case because the central
issue in this case, whether Liberty must pay on/breached the
performance bond is an issue that the parties could not have litigated in
the state action
Liberty argues that res judicata bars Dearborn from filing suit against Liberty. The
Court disagrees, Dearborn could not have brought this suit in the Posen litigation, for no
official contractor default had occurred, Dearborn had not demanded that Liberty perform
under the performance bond, and Liberty had not yet refused payment on the performance
bond.
Federal courts apply state preclusion law to determine whether res judicata bars a
present claim. Langdon v. Skelding, 11-2353, 2013 1662961, at *6, n. 4 (6th Cir. Apr. 17,
2013) (Table) (citing Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984)),
Collateral estoppel, or issue preclusion, precludes relitigation of an issue in
a subsequent, different cause of action between the same parties or their
privies when the prior proceeding culminated in a valid final judgment and the
issue was actually and necessarily determined in the prior proceeding. A
person is in privy to a party if, after the judgment, the person has an interest
in the matter affected by the judgment through one of the parties, such as by
inheritance, succession, or purchase. In order for collateral estoppel to
apply, the same ultimate issues underlying the first action must be involved
in the second action, and the parties must have had a full opportunity to
litigate the ultimate issues in the first action. Collateral estoppel is a flexible
judge-made rule generally said to have three purposes: To relieve parties of
the cost and vexation of multiple lawsuits, conserve judicial resources, and,
by preventing inconsistent decisions, encourage reliance on adjudication.
23
Premier Ctr. of Canton, LLC v. North Am. Speciality Ins. Co., 297799 , 2011 WL 5964611,
at *1 (Mich.Ct.App. Nov. 29, 2011) (all citations and quotation marks omitted).12
Here, the Court finds that Liberty has not shown that it has satisfied the last element
of res judicata–“whether the matter in the second case was or could have been resolved
in the first.” Adair v. State, 680 N.W.2d 386, 397 (Mich. 2004). “Res judicata bars every
claim arising from the same transaction that the parties, exercising reasonable diligence,
could have raised but did not.”
Id. (citation omitted).
Michigan applies the “same
transaction” test or approach to determine whether a first suit should bar a second. Id.
(citation omitted). “The ‘transaction’ test provides that ‘the assertion of different kinds or
theories of relief still constitutes a single cause of action if a single group of operative facts
gives rise to the assertion of relief.’” Id. (citation omitted.) The transactional approach is
“pragmatic.” Id. at 398 (citation omitted). Under the transactional approach, “a claim is
1
Here, a final decision was entered in the Posen litigation. See CAM Constr. v. Lake
Edgewood Condo. Ass’n, 640 N.W.2d 256, 260 (Mich. 2002) (“The entry of a judgment
pursuant to the acceptance of a mediation evaluation is, in essence, a consent judgment.”)
(citation omitted). See also Smith v. Township of Holly, Nos. 306406, 306758, 2013 WL
4081083 (Mich.Ct.App. Aug. 13, 2013) (quoting, “[r]es judicata applies to default judgments
and consent judgments as well as to judgments derived from contested trials.”) (citation
omitted). And see Suminiski v. State Farm Mut. Auto. Ins. Co., 273947, 2008 WL 400686,
at*2 (Mich.Ct.App. Feb. 14, 2008) (citing Larson v. Auto-Owners Ins. Co., 486 N.W.2d 128
(Mich.Ct.App. 1992) (“An accepted mediation evaluation serves as a final adjudication of
the claims mediated, and is therefore binding on the parties similar to a consent judgment
or settlement agreement.”)).
2
“To be in privity is to be so identified in interest with another party that the first litigant
represents the same legal right that the later litigant is trying to assert. The outer limit of
the doctrine traditionally requires both a ‘substantial identify of interests’ and a ‘working
functional relationship’ in which the interests of the nonparty are presented and protected
by the party in the litigation.” Adair v. State, 680 N.W.2d 386, 396 (Mich. 2004) (citations
omitted). Here, the Court, for the purposes of this motion, and because the Court finds res
judicata is not applicable, assumes that Liberty and Posen are privies.
24
viewed in ‘factual terms’ and considered ‘coterminous with the transaction, regardless of
the number of substantive theories, or variant forms of relief flowing from those theories,
that may be available to the plaintiff; * * * and regardless of the variations in the evidence
needed to support the theories or rights.’” Id. (citation omitted).
“[T]he determinative question is whether the claims in the instant case arose as part
of the same transaction as did the claims in [the prior case.]” Adair v. State, 680 N.W.2d
at 398. “Whether a factual grouping constitutes a transaction for purposes of res judicata
is to be determined pragmatically, by considering whether the facts are related in time,
space, origin or motivation, and whether they form a convenient trial unit[.]” Id. (citations,
emphases, and brackets removed).
Liberty argues that Dearborn has already litigated the issue of whether Posen
breached Contract 2. (Liberty’s Mot. for Summ. J. at 13.) Liberty maintains that Posen’s
alleged breach of Contract 2 is “central to the current action.” (Id.) Liberty explains that
“the issue is whether Posen breached the Contract by not completing the Project.” (Id.)
Liberty states that Posen and Dearborn have been at an impasse for several years, “as
they could not agree on whether work could proceed and, more importantly, who should
pay for dewatering efforts that would be necessary before work could proceed.” (Id.)
Liberty states that the question of which party is at fault for the project’s current problems
is at the heart of the issue. (Id.) Liberty says that the issues involve whether there was a
defective design or negligent construction. (Id.) Liberty posits that, if Dearborn or NTH is
at fault, “then Posen would be excused from its failure to complete the work.” (Id.) But “if
Posen is at fault, then its failure to complete would be deemed a breach of the Contract.”
(Id.)
25
Liberty argues that Dearborn’s affirmative defenses in the Posen litigation included the
allegation that Posen breached Contract 2. (Liberty Mot. for Summ. J. at 14.) Liberty
frames the issue of the Posen litigation as whether the Project’s problems “were the result
of defective or negligent construction by Posen, defective design by NTH, or changed
conditions.” (Id.) Liberty argues that, because Posen and Dearborn resolved the litigation,
that they also resolved those specific issues. (Id.)
Liberty suggests that “[o]ne cannot determine if Posen has breached the contract by
failing to timely complete the work under the Contract without determining if such failure is
Posen’s fault or [Dearborn/NTH’s.]” (Liberty’s Mot. for Summ. J. at 14.) Liberty argues that
the Posen litigation “squarely” addressed the issues present and that they “cannot be
relitigated now.” (Id.)
Liberty also argues that Dearborn could have raised the breach of contract issue in
the Posen litigation. (Liberty’s Mot. for Summ. J. at 15.) Liberty states that, “at all times
during the [Posen litigation], Posen was already in breach for failure to complete the work.”
(Id.) (emphasis removed.) Liberty points out that Dearborn knew that Posen was in breach
of the Contract during the first litigation and knew that it had the right to declare a default
under the Contract. (Id. at 16.)
Dearborn argues that this case’s central issue is whether Liberty breached the
performance bond by not completing the project or paying Dearborn the amount necessary
to complete the project, not whether Posen breached Contract 2. (Dearborn’s Resp. at 3.)
Dearborn maintains that the Posen litigation did not address these issues. (Id.) Dearborn
explains that Liberty was not a party to the Posen litigation and that Dearborn did not assert
any claims against Liberty. (Id.) Dearborn also maintains that it did not litigate Posen’s
26
failure to complete the project in the Posen litigation. (Id. at 4.) Dearborn states that the
Posen litigation was for Posen’s allegations relating to the increased costs and time
necessary to complete the project. (Id.)
Dearborn also argues that its claims against Liberty were not ripe–for the claims did
not even exist during the Posen litigation. (Dearborn’s Resp. at 4.) Dearborn suggests that
the performance bond states that Liberty’s obligations to Dearborn do not arise until
Dearborn terminates the contract. (Id.) Dearborn maintains that it did not terminate
Posen’s contract until September, 2011, and that Dearborn and Posen did not resolve their
claims until the Michigan state court dismissed their claims with prejudice in July, 2011.
(Id.)
Dearborn also points to the Standstill and Tolling Agreement as proof that it did not
litigate whether it terminated Contract 2 with Posen in the Posen Litigation. (Dearborn
Resp. at 6.) Dearborn states that the tolling agreement language “prohibited” Dearborn
from terminating Contract 2 until the agreement expired, on August 22, 2011. (Id. at 7.)
Dearborn claims that “[b]y entering into the Standstill and Tolling Agreement and agreeing
not to terminate Posen’s contract during the tolling period, [Dearborn,] Posen, and Liberty
[] all contractually agreed that [Dearborn] was reserving the issues related to Posen’s
obligation to complete the Project so that they could be addressed at a later date.” (Id.)
Dearborn adds that the tolling agreement is “unequivocal evidence” that the parties
understood that Dearborn had a future claim against Liberty under the performance bond.
(Id. at 7, n. 3.) Dearborn further adds that the tolling agreement evidences that Liberty
understood that the Posen litigation claims did not relate to terminating Contract 2. (Id.)
27
The Court agrees with Dearborn, the Posen litigation does not foreclose Dearborn
from bringing a suit against Liberty now. The Court has little doubt that what happened in
the Posen litigation will be relevant to this case. And the Court has little doubt that
Dearborn may be foreclosed from disputing certain issues given the Posen litigation. But
the Court finds that the Posen litigation did not involve Liberty or the performance bond, nor
did the prior litigation involve the issue of whether a contractor default occurred. The Posen
litigation sought additional funds and additional time to complete Contract 2. The Court
also finds that, in a light most favorable to Dearborn, this case’s central issues, the
performance bond’s alleged breach, was not ripe during the pendency of the Posen
litigation. Res judicata does not bar this suit.
Nor is the Court inclined to find that res judicata bars this suit when no party has given
a detailed account of what occurred in the Posen litigation, i.e., what claims the case
evaluation settled. See Fisher v. Cornell Eng’g, 270252, 270258, 2007 WL 3033955, at *5
(Mich.Ct.App. Oct. 18, 2007) (pointing out that “a court may take cognizance of what was
discussed in the course of case evaluation for purposes of ascertaining whether those
discussions led to adjudication on the merits of an issue; and finding that the trial court did
not err when it consulted case evaluation summaries “to the extent necessary to ascertain
whether [a claim] had in fact been adjudicated[.]”) (citations omitted).
The Court additionally finds Liberty’s entering into the tolling agreement telling. While
the tolling agreement preserves any claims that arose before the parties entered into the
tolling agreement, the Court finds that the tolling agreement is an additional consideration
that factors into the Court’s finding that res judicata does not preclude this suit.
28
2. A genuine issue of fact exists as to whether a material breach of Contract
2 occurred, entitling Dearborn to declare a contractor default, and
whether Dearborn’s alleged delay in declaring a contractor default
prejudiced Liberty
Liberty also argues that summary judgment is proper based upon the contractual
period of limitations in the performance bond. (Liberty’s Mot. for Summ. J. at 18.) Liberty
maintains that the performance bond requires Dearborn to bring suit on the bond within two
years from the earliest of three separate events. (Id.) Liberty points out that one of these
events is a “Contractor Default,” which the performance bonds defines as “Failure of the
Contractor, which has neither been remedied nor waived, to perform or otherwise to comply
with the terms of the Contract.” (Id.) Liberty argues that a contractor default occurred and
that Dearborn had to bring suit within two years, which Liberty argues Dearborn failed to
do. (Id.)
Liberty argues that “[t]here can be no dispute that there was a “Contractor Default” as
of April 1, 2007 (when Posen failed to reach substantial compliance) or at the very latest
as of May 1, 2007 (when Posed failed to reach final completion of the Project). (Liberty’s
Mot. at 20.) Liberty argues that the fact that neither Dearborn, NTH, nor Posen sought to
extend Contract 2's dates proves that a contractor default occurred, at the latest, on May
1, 2007. (Id. at 20-21.) Liberty maintains, therefore, that Dearborn had to bring suit under
the performance bond by May 1, 2009. (Id. at 21.)
Liberty argues that Dearborn did not waive Posen’s failure to timely complete the
project and that neither Posen nor another party had remedied the issues. (Liberty’s Mot.
at 21.) Given the failure to remedy or waive the time provisions, Liberty argues that Posen
definitively committed a contractor default, which triggered the contractual limitations period
29
for the performance bond. (Id.) Liberty states that Dearborn “cannot claim that Posen’s
obligation to complete the Project within the required deadlines was ever waived or
remedied, as that would undermine the very claim on the Performance Bond, which is
predicated on Posen’s failure to complete the work.” (Id.)
Dearborn counters that Liberty has chosen the completion date in Contract 2 so as
to have a convenient contractual period of limitations argument. (Dearborn’s Resp. at 14.)
Dearborn argues that Posen’s refusal to complete the project was the relevant Contractor
Default that started the performance bond’s limitations period tolling. (Id. at 15.)
The Court finds that issues of fact exist as to whether a contractor default occurred
and whether Dearborn’s delay in declaring Posen in default prejudiced Liberty.
Here, the Court notes that there is first an issue of fact as to whether the 2006 blow-in
and events following, including the failure to complete the caisson by the contract dates
was a material breach requiring Dearborn to declare a default. Liberty, though, does not
distinguish between default and breach, for the blow-in, events immediately following, and
the failure to meet Contract 2's completion dates, may have been a breach of Contract 2,
but those events may not have been a material breach that required Dearborn to declare
a default.
Although the terms “breach” and “default” are sometimes used
interchangeably, their meanings are distinct in construction suretyship law.
Not every breach of a construction contract constitutes a default sufficient to
require the surety to step in and remedy it. To constitute a legal default,
there must be a (1) material breach or series of material breaches (2) of such
magnitude that the obligee is justified in terminating the contract. Usually the
principal is unable to complete the project, leaving termination of the contract
the obligee’s only option.
30
L&A Contracting Co. v. Southern Concrete Serv., Inc., 17 F.3d 106, 110 (5th Cir. 1994)
(all citations omitted). See Will H. Hall & Son, Inc. v. Capital Indem. Corp., 222262, 2001
WL 685772 (Mich. Ct. App. June 15, 2001) (holding that a reasonable factfinder could find
that the defendant surety received notice that the subcontractor committed a material
breach, that the plaintiff principal regarded the subcontractor to have failed to meet its
contractual duties, and that the plaintiff was asking the surety to perform under the terms
of the bond.) (And citing L&A Contracting Co. v. Southern Concrete Serv., Inc., 17 F.3d 106
(5th Cir. 1994) with approval.)
The distinction between default and breach is important:
Serious legal consequences attend a “declaration of default”, particularly in
cases such as this case involving multi-million-dollar construction projects.
Before a declaration of default, sureties face possible tort liability for
meddling in the affairs of their principals. After a declaration of default, the
relationship changes dramatically, and the surety owes immediate duties to
the obligee. Given the consequences that follow a declaration of default, it
is vital that the declaration be made in terms sufficiently clear, direct, and
unequivocal to inform the surety that the principal has defaulted on its
obligations and the surety must immediately commence performing under the
terms of its bond. Sureties deprived of a clear rule for notices of default
would be reluctant to enter into otherwise profitable contracts.
L&A Contracting Co., 17 F.3d at 110-11 (all citations omitted).
Liberty has an extra burden in making the argument that Dearborn should have
declared Posen in default earlier. In Michigan, courts are to “more strictly construe[]” surety
bonds against paid sureties than gratuitous sureties. Kilpatrick Bros. Painting v. Chippewa
Hills Sch. Dist., 262396, 2006 WL 664210, at *5 (Mich.Ct.App. Mar. 16, 2006) (citation
omitted). A surety that attempts to “cut off responsibility on the ground that its insured did
not comply with a contract provision requiring notice immediately or within a reasonable
time must establish actual prejudice to its position.” Id. (stating that Michigan law applies
31
insurance contract law to cases involving sureties.). A paid surety, therefore, “must
demonstrate that it has been prejudiced before it will be released from its contract of
guarantee. [sic]” Id. (citation omitted). “It is not enough that there is a deviation from the
terms of the contract, but it must be a material deviation with a paid surety, and one which
results in injury to it in order to release it from liability.” Id. (citation omitted).
Here, Liberty is a paid surety; it must therefore show that it has been prejudiced by
the alleged delay of Dearborn declaring a default. Liberty alleges that the late default
prejudiced it by taking away its ability to seek monetary recourse from Posen. Liberty has
stated that Posen was financially stable in 2007 and 2008 and that, by the time Dearborn
declared a default in 2011, Posen was no longer financially solvent. The Court more fully
addresses this argument below.
The Court again agrees with Dearborn–summary judgment is not appropriate given
Liberty’s argument that, under the performance bond, a contractor default occurred when
Posen did not meet the substantial completion date or the final completion date. Here,
while Posen did not complete Contract 2 by the specified completion date, there is no
indication that Posen or Dearborn considered that failure to complete the caisson by 2007
to be a material breach. In a light most favorable to Dearborn, the Court finds that the
failure to reach the date is not a material breach, given the fact that Dearborn advanced
more money to Posen to resolve the contested issues and complete the caisson. The Court
finds further evidence that the failure to meet Contract 2's deadline was not a material
breach in that Posen filed the Posen litigation to receive the funds and time necessary to
complete the caisson. Given that Posen, in the prior litigation, represented the desire to
continue work on the caisson, and the fact that the parties ultimately accepted a case
32
evaluation issue that settled the parties issues so that Posen continued to work, the Court
finds that Contract 2's completion deadline was not the date on which the performance
bond began to toll. Even more support exists in the fact that all the parties involved, Posen,
Dearborn, and Liberty, entered into the tolling agreement, which, although not effective until
July 10, 2010, expressly stated that Dearborn could not terminate Posen. While Liberty
argues that the tolling agreement’s limitations period had already expired by that date, the
Court disagrees. By inference, and viewing the facts in a light most favorable to Dearborn,
the Court finds that the tolling agreement supports Dearborn’s argument–failing to adhere
to Contract 2's completion date may have been a breach of Contract 2, but it was not a
material breach that resulted or should have resulted in termination of Contract 2. The
Court denies Liberty’s motion in regards to the contractual period of limitations as well.3
B. The Court denies in part and grants in part Dearborn’s motion for summary
judgment because there are material issues of fact whether Dearborn is
entitled to a declaratory judgment and material issues of fact regarding
Liberty’s arguments of discharge by modification or abandonment, waiver,
and damages; the Court grants Dearborn’s motion with respect to discharge
by impossibility
Dearborn has filed its own motion for summary judgment. It argues that it is entitled
to a declaratory judgment that Liberty must perform under the performance bond and that
the arguments that Liberty has asserted to escape the performance bond are baseless.
Because the Court finds that there are genuine issues of material fact regarding several of
3
The Court views the facts in a light most favorable to Dearborn in this section. Below,
discussing Dearborn’s arguments on the contractual period of limitations, the Court does
the opposite, and addresses Liberty’s factual arguments concerning the contractual period
of limitations.
33
Liberty’s arguments to not perform the performance bond, the Court denies Dearborn’s
motion for summary judgment with respect to the declaratory judgment.
1. There is a genuine issue of fact whether Liberty is entitled to discharge
the performance bond by impairment
Both parties characterize the discharge by impairment argument in a similar
fashion–both state that Liberty argues that it was prejudiced by Dearborn’s waiting too long
to declare a default under Contract 2, between Dearborn and Posen. (Dearborn’s Mot. at
15; Liberty’s Resp. at 20.)
Dearborn argues that it is entitled to summary judgment because the performance
bond tells Dearborn when it may file suit against Liberty. (Dearborn’s Mot. at 15.) That
timing is that Dearborn must file suit within two years of Posen stopping work, Dearborn
declaring a contractor default, or two years of Liberty refusing payment on the performance
bond. (Dearborn’s Mot. at 15, Performance Bond ¶ 9.) Dearborn asserts that it has
complied with the performance bond, for it has filed suit within two years of it declaring
Posen in contractor default. (Dearborn’s Mot. at 15.) Dearborn also argues that Liberty
cannot force it to declare a contractor default and cannot second-guess its timing of
Posen’s termination. (Id.) Dearborn maintains that Liberty cannot complain “of the very
risks that it obligated itself to protect against when it took money to issue the [p]erformance
[b]ond.” (Id. at 16.) Dearborn finally asserts that Liberty cannot complain “about the length
of time that passed before [Dearborn] terminated Posen,” because Liberty “voluntarily”
entered into the standstill and tolling agreement. (Id.) Dearborn points out that Liberty also
voluntarily extended the tolling agreement. (Id.) And Dearborn further points out that the
tolling agreement gave Liberty the right to terminate it with thirty days’ notice. (Id.) This
34
right, coupled with Liberty’s knowledge of Posen’s deteriorating financial condition,
Dearborn argues, should persuade the Court that Liberty is not entitled to discharge by
impairment. (Id.)
Liberty argues, pointing to the Restatement (Third) of Suretyship and Guaranty, that
Dearborn’s failure to declare a contractor default in 2006 or 2007 and waiting until 2011 has
severely prejudiced Liberty’s ability to seek recourse against the now financially defunct
Posen. (Liberty’s Resp. at 20-21.)
Michigan courts do look to the Restatement (Third) of Suretyship and Guaranty for
guidance when presented with surety issues. See Will H. Hall & Son, Inc. v. Ace Masonry
Constr., Inc., 677 N.W.2d 51, (Mich.Ct.App. 2003) (stating that “Michigan case law is
minimal concerning sureties,” but looking to the Restatement (Third) of Suretyship and
Guaranty for guidance.).
Neither party cites the restatement section that is most appropriate here–§ 50. Effect
on Secondary Obligation of Obligee's Lack of Action to Enforce Underlying Obligation.
That section provides:
(1) Delay by the obligee [(Dearborn)] in taking action against the principal obligor
[(Posen)] with respect to the underlying obligation, or failure of the obligee to take
such action, does not discharge the secondary obligor [(Liberty)] with respect to
the secondary obligation except as provided:
(a)
by applicable statute;
(b)
by agreement of the parties;
(c)
in § 43 of this Restatement; or
(d)
in subsection (2) of this section.
(2) If the failure of efforts by the obligee to obtain satisfaction of the underlying
obligation is a condition of the secondary obligor’s duty pursuant to the secondary
35
obligation, the secondary obligor is discharged to the extent that the obligee’s
failure to act with reasonable promptness against the principal obligor is the cause
of the obligee’s inability to collect from the principal obligor.
When none of (1)’s subsections applies, the Restatement gives a useful illustration:
P owes C $1,000 with S as secondary obligor. P defaults and C conducts a
series of negotiations with P in respect of payment without modifying the
contract between C and P. The negotiations are fruitless. Although P was
solvent at the time of default, P becomes wholly insolvent during the period
of the delay. S is not discharged from its secondary obligation by reason of
the delay.
Restatement (Third) of Suretyship and Guaranty § 50, illus. 2.
This section strikes at the heart of Liberty’s argument–that Dearborn has prejudiced
it so significantly that Posen is now insolvent. Following § 50, as a Michigan court would,
then, Liberty could not succeed on its argument that Posen’s insolvency prejudiced it.
Case law is sparse in this area of the law. John T. Callahan & Sons, Inc. v. Dykeman Elec.
Co., Inc., 266 F.Supp.2d 208 (D.Mass. 2003), is instructive, though. In Callahan, the court,
looking to case law and the Restatement (Third) of Suretyship and Guaranty, agreed with
the premise that “a material change in the underlying contract made without a surety’s
consent operates as a discharge if the modification increases the surety’s risk.” 266
F.Supp.2d at 235. There, the court noted the surety’s argument, which parallels Liberty’s
argument. The court noted that the surety was arguing that the obligee (Dearborn, here)
delayed in declaring the principal obligor (Posen, here) in default and that delay “materially
prejudiced” the surety or “materially increased its risk under the bond,” because, during the
delay, the principal obligor became insolvent. Id. at 237.
The Callahan court held that a delay in declaring a default was not a breach of the
underlying contract or a material modification. 266 F.2d at 237. The court looked to the
36
performance bond, which did not set a time period for the obligee (Dearborn) to declare a
default. Id. Because the performance bond did not specify a time, the court held, the delay
in declaring a default did not materially modify the underlying subcontract (which the
performance bond secured). Id. There, the court rejected the surety’s argument that it was
no longer liable when the obligee failed to act and declare a default in a more timely
manner when the principal obligor was no longer solvent at the time of default. The court
pointed out § 50 and its illustration and held that the delay in declaring a default, even if the
delay prejudiced the surety’s ability to obtain reimbursement from the principal obligors, did
not discharge the surety’s obligations under the performance bond.
Callahan, 266
F.Supp.2d at 238.
But the Callahan court did point out a provision of the performance bond that mirrors
a provision in this case–a provision that requires filling suit under the bond before the
expiration of two years from the date that the principal obligor (Posen) ceased working.
266 F.Supp.2d at 237, n. 43. The court discussed that the surety’s argument “might merit
summary judgment if [the obligee’s] delay resulted in . . . a violation of this express [timing]
condition.” Id. (citing Restatement (Third) of Suretyship and Guaranty §§ 43 and 51(1)(c)
(1996)).
Here, although Liberty does not devote a section of its response to the two-year
performance bond period of limitations, Liberty does allude to it, and does point to
testimony of its representative that work stopped on the caisson in 2006. (Liberty’s Resp.
at 27.) The Court finds that there are genuine issues of fact as to when Posen quit working
on the caisson. Posen’s president testified that Posen quit working on the caisson after the
failed 2008 dewatering (but not noting the exact date). (Zapczynski Aff. ¶ 3.) Dearborn’s
37
representative stated that Posen continued working on the caisson after the 2006 blow-in
and after the failed 2008 dewatering. (Murray Dep. at 10, 37, 38.) A genuine issue of fact
exists as to whether § 50 applies in this case.
Liberty argues that § 37, Impairment of Suretyship Status, relieves Liberty of its duties
under the performance bond because Dearborn, by delaying declaring a contractor default,
has prejudiced Liberty.
Section 37 provides:
(1) If the obligee acts to increase the secondary obligor’s risk of loss by
increasing its potential cost of performance or decreasing its potential ability
to cause the principal obligor to bear the cost of performance, the secondary
obligor is discharged as described in subsections (2) and (3), and the
secondary obligor has a claim against the obligee as described in subsection
(4). An act that increases the secondary obligor’s risk of loss by increasing
its potential cost of performance or decreasing its potential ability to cause
the principal obligor to bear the cost of performance is an “impairment of
suretyship status.”
(2) If the obligee fundamentally alters the risks imposed on the secondary
obligor by:
(a)
(b)
releasing the principal obligor from a duty other than the payment of
money (§39(c)(iii)); or
agreeing to a modification of the duties of the principal obligor that
either amounts to a substituted contract or imposes risks on the
secondary obligor fundamentally different from those imposed on the
secondary olbligor prior to modification(§41(b)(I));
the secondary obligor is discharged from any unperformed portion of the
secondary obligation as more fully set forth in those sections.
(3) If the obligee impairs the secondary obligor’s recourse against the
principal obligor by:
(a)
(b)
releasing the principal obligor from a duty to pay money (§39(c)(ii));
granting the principal obligor an extension of time for performance
of its duties pursuant to the underlying obligation (§40(b));
38
(c)
agreeing to a modification of the duties of the principal obligor, other
than a release or an extension of time, that does not amount to a
substituted contract or impose risks on the secondary obligor
fundamentally differently from those imposed on the secondary
obligor prior to modification (§41(b)(ii));
(d)
impairing the value of an interest in collateral securing the underlying
obligation (§42);
(e)
failing to institute an action before expiration of the statute of
limitations governing the underlying obligation (§43); or
(f) any other act or omission that impairs the principal obligor’s duty of
performance, the principal obligor’s duty to reimburse, or the secondary
obligor’s right of restitution or subrogation (§ 44);
the secondary obligor is discharged from its duties pursuant to the secondary
obligation to the extent set forth in those sections in order to prevent the
impairment of recourse from causing the secondary obligor a loss[.]
Liberty argues that Dearborn’s failure to terminate Posen is akin to granting Posen an
extension of time, which § 38 covers. Comment b to § 38, Liberty asserts, notes that the
passage of time can prejudice the surety so as to impair the surety contract.4 Liberty
4
Restatement (Third) of Suretyship & Guaranty § 38: Preservation of Secondary
Obligor’s Recourse (1996).
(1)
When an obligee releases the principal obligor from, or agrees to extent the time for
performance of, a duty to pay money pursuant to the underlying obligation, the
release or extension effects a “preservation of secondary obligor’s recourse” with
respect to that duty if the express terms of the release or extension provide that:
(a)
the obligee retains the right to seek performance of the secondary obligation
by the secondary obligor; and
(b)
the rights of the secondary obligor to recourse against the principal obligor
. . . continue as though the release or extension has not been granted.
(2)
When the obligee effects a preservation of the secondary obligor’s recourse in
conjunction with a release or extension, the principal obligor’s duties of performance
and reimbursement and the secondary obligor’s rights of restitution and subrogation
continue as though the release or extension did not occur.
Comment b. Under § 37(3), the obligee's impairment of the secondary obligor's recourse
generally will discharge the secondary obligor to the extent necessary to prevent loss.
While preservation of recourse by the obligee lessens the risk of the secondary obligor
suffering a loss as a result of impairment of recourse, it does not necessarily prevent that
loss. This is the case because, in most contexts, secondary obligors do not seek to enforce
their rights against principal obligors until the obligee seeks performance from the
39
argues that overwhelming evidence exists that Dearborn had the right to default and
terminate Posen by early 2007, if not earlier. (Liberty’s Resp. at 21.) The failure to default
Posen earlier, Liberty argues, prejudiced Liberty because Posen now has a “significantly
decreased financial status.” (Id. at 22.)
Here, Liberty has submitted an affidavit stating that Posen is so financially destitute
that Liberty is prejudiced in its ability to seek recourse from Posen. (Zapczynski Aff. ¶ 8.)
While the Court finds that Liberty’s financial-recourse impairment argument is not the
type of argument contemplated by the Restatement, as § 50 more appropriately fits the
facts of this case, the Court has also found a genuine issue of fact as to whether § 50
applies.
The Court therefore denies Dearborn’s motion with respect to the discharge by
impairment argument.
2. There is a genuine issue of fact whether Liberty is entitled to discharge
because Dearborn modified or abandoned Contract 2
secondary obligor. If the secondary obligor first learns of an extension or release (and the
accompanying preservation of recourse) a significant time later, the passage of time may
rob the secondary obligor's recourse of any practical value if the principal obligor's ability
to perform has degenerated during that time. If, on the other hand, the obligee informs the
secondary obligor promptly of the extension or release and the preservation of recourse,
the obligee can prevent this type of loss.
Nonetheless, even when the secondary obligor is aware of both the release or
extension and the preservation of recourse, loss can still occur. The release or extension
may, for example, induce behavior on the part of the principal obligor that lessens the
principal obligor's ability to perform. Once again, however, the obligee can minimize the
likelihood of such a loss by promptly informing the secondary obligor of the release or
extension and the preservation of recourse. Thus informed, the secondary obligor has an
incentive to discourage behavior of the principal obligor inconsistent with its obligations to
the secondary obligor.
40
Liberty asserts that Dearborn modified and/or abandoned Contract 2, thereby altering
Contract 2 so significantly as to discharge Liberty from performance of the performance
bond.
Dearborn argues that it is entitled to summary judgment on Liberty’s
modification/abandonment claim. Dearborn argues that it “never ordered Posen to build
anything other than what Posen contracted to build, directed Posen to do so, [n]or issued
a work change directive or change work order requiring Posen to build anything other than
what it was contractually required to build.” (Dearborn’s Mot. at 17.) Dearborn also asserts
that there was never any agreement between it and Posen for Posen to construct anything
but the caisson as contemplated by Contract 2. (Id.)
a. There is a question of fact whether Liberty should be discharged from
the performance bond because Dearborn modified Contract 2
Liberty again points to the Restatement (Third) of Suretyship and Guaranty on
modification to support its argument that an issue of fact exists to withstand Dearborn’s
motion for summary judgment. Liberty argues that Dearborn’s revised BOD and taking
actions to secure CDM, a new contractor, and taking steps towards transitioning away from
Contract 2 as contemplated (e.g., seeking the NPDES permit from MDEQ), create an issue
of material fact as to whether Dearborn modified or abandoned Contract 2.
Section 41, Modification of Underlying Obligation, provides:
If the principal obligor and the obligee agree to a modification, other than an
extension of time or a complete or partial release, of the principal obligor’s
duties pursuant to the underlying obligation:
(a)
any duty of the principal obligor to the secondary obligor of
performance or reimbursement is correspondingly modified;
(b)
the secondary obligor is discharged from any underperformed duties
pursuant to the secondary obligation:
41
(i) if the modification creates a substituted contract or imposes risks on
the secondary obligor fundamentally different from those imposed
pursuant to the transaction prior to modification;
(ii) in other cases, to the extent that modification would otherwise cause
the secondary obligor a loss;
(c)
to the extent that the secondary obligor is not discharged by
operation of paragraph (b) from its duties:
(i) the secondary obligation is correspondingly modified;
(ii) if the modification of the underlying obligation changes the amount
of money payable thereunder, or the timing of such payment, the
secondary obligor may perform the secondary obligation as though
there had been no modification;
(d)
the secondary obligor has a claim against the obligee to the extent
provided in § 37(4)).
Here, evidence exists to defeat Dearborn’s motion for summary judgment. Dearborn’s
designee, Murray, stated that Posen unreasonably stopped working on the caisson even
when Dearborn was taking steps to provide a cheaper and easier solution to construct the
caisson. (Liberty’s Mot.; Ex. O, Murray Dep. at 158.) NTH’s consultant, Larry Gilbert,
testified that Dearborn sought to modify Contract 2 with the revised BOD. (Liberty’s Mot.,
Ex. Y, Gilbert Dep. at 276-77.) He also testified that the new design would be a “significant
deviation” from the original design. (Id. at 262.) Letters from NTH also exist in which NTH
expresses the viewpoint that Dearborn intended to adopt the revised BOD and proceed
with construction under that design. (Liberty’s Resp., Exs. E, F.) Other letters from NTH
exist, as reviewed above, that show that NTH became aware of Dearborn’s intent to
proceed with CDM’s proposed “tremie slab work,” which the revised BOD contemplated.
(Liberty’s Resp., Ex. J.) NTH further expressed that it believed that Dearborn had replaced
NTH with CDM as the project’s engineer. (Id.)
Finally Zapczynski, Posen’s president, further maintains that, after the revised BOD,
Posen and Dearborn did not discuss continuing work under the original design.
42
(Zapczynski Aff. ¶ 5.) Zapczynski also claims that Dearborn “sought work on the Project
to continue under the new basis of design, but Posen refused to go forward with the new
design without agreement as to how much” Dearborn would pay Posen. (Id. ¶ 6.)
Liberty has also submitted a March 16, 2010 email from Murray to CDM about the
entire CSO project. (Liberty’s Mot., Ex. K.) In the email, Murray states that Dearborn and
CDM needed to meet with NTH to develop a hand off strategy for the Contract 2 caisson
as Dearborn moved forward with the MDEQ modified permit negotiations. (Id.)
Given the evidence that supports Liberty’s position that Dearborn took significant
strides towards enacting the revised BOD, including securing permits and switching
engineers, the Court finds that there is a genuine issue of material fact whether Dearborn
sought to modify Contract 2 to the extent that it no longer resembled the contract that
Liberty’s performance bond secured. But the Court notes that the modification must be a
material modification, and that Liberty bears the burden to show that the modification
increased its risk. See Callahan, 266 F.Supp.2d 208 (citing a case for the proposition that
a substitution of a party in a subcontract could create a different underlying
contract/modification and therefore discharge the surety if the surety could demonstrate
that the modification increased the surety’s risk.)(but also noting that “[a]ny such
substitution [] is a genuine issue of material fact.”).
See also Haddad v. Western
Contracting Corp., 71 F.Supp. 212, 215 (N.D.W.Va. 1946) (stating, “[a]n alteration or
modification of a construction contract without the surety’s knowledge or consent will not
discharge a compensated surety in the absence of material prejudice to the surety.”)
(citation omitted).
43
b. There is a genuine issue of fact as to whether Liberty should be
discharged from the performance bond because Dearborn abandoned
Contract 2
Liberty also argues that summary judgment is not appropriate on its abandonment
claim. (Liberty’s Resp. at 24-25.) Liberty maintains that testimony and documents exist
to show that Dearborn and Posen “had no intention of completing the [caisson] as originally
designed.” (Id. at 25.) Liberty states that Dearborn hired a new engineer to develop a new
concept for the Contract 2 caisson, submitted that concept to MDEQ, which issued a new
permit requiring construction of the new design. (Id.) Because Dearborn abandoned
Contract 2, Liberty argues, Posen has no obligation, and therefore Liberty has no
obligation, under the performance bond. (Id.)
The Court finds that evidence exists to withstand Dearborn’s argument that summary
judgment is appropriate on abandonment.
“The abandonment of a contract is a matter of intention to be ascertained from the
facts and circumstances surrounding the transaction from which the abandonment is
claimed to have resulted.” Asphalt Solutions Plus, LLC v. Associated Constr. of Battle
Creek, Inc., 301136, 2011 WL 6187043, at *2 (Mich.Ct.App. Dec. 13. 2011) (citations
omitted). “Abandonment of a contract “may be inferred from the conduct of the parties and
the attendant circumstances. A contract will be treated as abandoned when acts of one
party, inconsistent with the existence of a contract, are acquiesced in by the other party.”
Id. (citations omitted).
“A party displays intent to abandon if it ‘positively and absolutely refuses to perform
the conditions of the contract, such as a failure to make payments due, accompanied by
other circumstances, or where by [its] conduct [it] clearly shows an intention to abandon the
44
contract.’” Interior/Exterior Specialist Co. v. Devon Indus. Grp., LLC, 276620, 2009 WL
49616, at *5 (Mich.Ct.App. Jan. 8, 2009) (citation omitted, insertions in Interior).
“Abandonment must be mutual, however; if one party continues to perform under the
contract after the other party exhibits its intent to abandon, there has been no
abandonment.” Id. (citations omitted) (citing a case that found “that the parties abandoned
the contract because one party ordered work not contemplated in the contract and the
other party ‘acquiesced’ by performing the non-contractual work rather than performing
under the contract.”) Id. (citation omitted).
“Whether there has been an abandonment of a contract is a question of fact to be
determined by the jury.” Interior, 2009 WL 49616, at *6 (citations omitted).
The Court finds that evidence exists, viewed in a light most favorable to Liberty, that
Dearborn intended to abandon Contract 2 as designed.
Liberty states that Dearborn terminated its relationship with NTH, evidencing the fact
Dearborn had decided to abandon Contract 2. (Liberty’s Resp. at 12.) Liberty points to
three letters NTH sent to Dearborn. (Liberty’s Resp., Exs. J, E. F.) These letters, which
NTH sent in February and March, 2011, show NTH’s position concerning CDM’s
involvement in continuing the caisson project, the risks associated with CDM’s plan, and
the relationship status between Dearborn and NTH.
On February 18, 2011, NTH wrote to Dearborn that NTH became aware of CDM’s
proposed plan of “tremie slab work,” a plan that aligned with the revised BOD rather than
the original contract. (Liberty’s Resp., Ex. J.) NTH warns Dearborn of the risks associated
with the tremie slab work. (Id.) NTH also informs Dearborn that it is aware of the direct
communications between Dearborn and Posen, which NTH stated was contrary to the
45
Dearborn-NTH contract. (Id.) NTH comments that it found that Dearborn’s actions were
contrary to its contract with Dearborn and that NTH found that CDM had replaced it as
engineer on the project. (Id.)
On March 8, 2011, NTH sent another letter to Dearborn. (Liberty’s Resp., Ex. E.) In
this letter, NTH disagrees with Dearborn’s framing of Contract 2's status. (Id.) NTH states
that Contract 2 has been dormant for two years. (Id.) NTH notes that it believes that
Dearborn’s intent is to continue the caisson construction under CDM’s proposed alternate
design. (Id.) NTH further notes that it already believes that it is no longer the engineer of
record and that Dearborn has already terminated the Dearborn/NTH contract. (Id.)
A week later, on March 16, 2011, NTH again sent a letter to Dearborn. (Liberty’s
Resp., Ex. F.) NTH affirms its position–Dearborn has chosen an alternate path regarding
the caisson. (Id.) NTH states that Dearborn is not attempting to mitigate its damages, but
rather is proceeding in a new direction. (Id.) NTH contests Dearborn’s contention that
work has been performed on the site.
(Id.)
NTH states that the reading of the
“geotechnical instrumentation on” Contract 2 was not work that Contract 2 required but
rather “an additional service separate and distinct from the construction contract
administration and engineering services performed prior to the suspension of work on these
projects.” (Id.)
Liberty also points to a March 16, 2010 email from Murray/Dearborn to CDM about
the entire CSO project. (Liberty’s Mot., Ex. K.) In this email, Murray states to Carl
Johnson, a CDM employee, that Dearborn and CDM needed to meet with NTH to “develop
a co-ordination/hand-off strategy for CSO 2, 3, and 5 as we move forward with the MDNRE
modified permit negotiations and litigations [sic] issues are resolved.” (Id.) Johnson then
46
sent an email, on March 31, 2010, to various CDM employees. (Liberty’s Resp., Ex. L.)
Johnson gives the status of the CSO project. (Id.) He notes that NTH would stay on as a
subconsultant to CDM on Contract 2, but that NTH should start handing off work to CDM
by September 30. (Id.) Johnson also notes that CDM would inherit Contract 2's legacy
design and that CDM could help to define the scope of the work. (Id.)
Evidence therefore exists that Dearborn replaced NTH as the engineer on the entire
CSO project, communicated directly with Posen, and sought to enact a revised BOD with
a new engineer. This evidence is enough to survive Dearborn’s motion. See Asphalt
Solutions, 2011 WL 6187043, at *2 (holding that a subcontractor abandoned a contract with
the project manager when the subcontractor sent proposals directly to the
prime
contractor, ignored the procedure for updating the subcontract to make additions to the
subcontract, and proposed changes to the cost of the originally contracted work.). See also
Interior, 2009 WL 49616, at *6 (upholding a jury verdict that the parties mutually agreed to
abandon the contract when the plaintiff presented evidence that the defendant “acted
inconsistently with the terms of the contract by denying [the] plaintiff control over its means
and methods and directing it to perform in a certain manner, directing [the] plaintiff to
perform work outside the scope of the original contract, and forcing [the] plaintiff to perform
under conditions contrary to those contracted for. [The plaintiff] also demonstrated that it
acquiesced in [the defendant’s] acts instead of exercising its rights to cease performance.”).
Given this evidence, summary judgment is not appropriate.
3. Contractual period of limitations
47
The Court has already addressed the contractual period of limitations in Liberty’s
motion for summary judgment. Summary judgment is not appropriate on this argument.
Viewing the facts in a light most favorable to Liberty, there is evidence that Posen
performed no significant work at the caisson after the 2006 blow-in and no work after the
2008 failed dewatering. There are issues of fact as to whether Posen performed work on
Contract 2, under Contract 2, after 2006 and whether the 2009 change order and the failed
subsequent dewatering efforts and maintaining the water level in the caisson could be
viewed as performing work on Contract 2.
4. Waiver of default and waiver of right to terminate
Dearborn argues that it is entitled to summary judgment on Liberty’s claim that
Dearborn waived its right to declare a default or terminate Contract 2. (Dearborn’s Mot. at
23.)
Liberty argues that Dearborn knew of its rights to default or terminate Posen and that
Dearborn did nothing save for tell Posen to continue working. (Liberty Resp. at 29.) Liberty
states that Dearborn intentionally did not terminate Contract 2 for its own litigation strategy
reasons. (Id. at 29-30.)
“[W]aiver is a voluntary and intentional abandonment of a known right.” Quality
Products & Concepts Co. v. Nagel Precision, Inc., 666 N.W.2d 251, 258 (Mich. 2003)
(citations omitted). “[W]hen a course of conduct establishes by clear and convincing
evidence that a contracting party, relying on the terms of the prior contract, knowingly
waived enforcement of those terms, the requirement of mutual agreement has been
satisfied.” Id.
48
The Court finds that summary judgment is not appropriate on this claim. Given that
the Court found that issues of fact exist as to whether Dearborn abandoned Contract 2, the
Court finds that that finding goes hand-in-hand with a finding that issues of fact exist as to
this claim as well. For if a jury finds that Dearborn abandoned Contract 2, Dearborn must
have therefore abandoned the rights it had under that contract, including the right to
declare a default or terminate Posen. See Callahan, 266 F.Supp.2d at 238 (in addressing
the surety’s waiver argument, holding that as long as the obligee “took action within two
years of the cessation of work, the bond did not expressly require [the obligee] to act within
a shorter period of time.”).
5. Impossibility of performance
Dearborn argues that Liberty has no evidence to support the claim of impossibility.
(Dearborn’s Mot. at 24.) Dearborn maintains that Liberty has retained no experts to testify
to this allegation and has conducted no soil stabilization studies to determine whether a
contractor could complete the caisson as originally designed. (Id. at 24-25.) Dearborn
offers NTH’s consultant’s opinion, who testified that Contract 2 could be completed as
designed. (Id. at 25.)
Liberty argues that Dearborn has mischaracterized its impossibility argument.
(Liberty’s Mot. at 31.) Liberty argues that there is not a physical impossibility, but rather a
practical impossibility due to the caisson’s current circumstances. (Id.) Liberty states that
the caisson is full of water and that the Posen litigation already determined that Dearborn
was at fault for the water in the caisson. (Id.) Liberty also argues that Dearborn and Posen
could not agree on how they would go forward with the work on Contract 2. (Id.) Liberty
maintains that “[t]he impasse between the parties has left Posen and [Dearborn] with a
49
situation in which the Project simply cannot be completed without a determination of who
was at fault.” (Id. at 31-32.) Liberty explains that, since a fault determination occurred in
the Posen litigation, that issue “can no longer be litigated, leaving the parties without the
means to go forward, and creating an impossibility.” (Id. at 32.) Liberty states there is a
practical impossibility given the circumstances.
In its reply, Dearborn maintains that the Posen litigation solely resolved Posen’s
claims relating to the differing site conditions and design defects. (Dearborn’s Reply at 6.)
Dearborn maintains that, after the Posen litigation, “all of Posen’s claims relative to soil
stabilization were resolved, including Posen’s claims for additional costs to implement soil
stabilization.” (Id.)
Liberty’s argument misses the mark as much as Dearborn’s characterization. The
Court grants Dearborn’s motion for summary judgment, for Liberty has not brought forth
any compelling arguments of facts to withstand the motion. There are two types of
impossibility in Michigan, as explained in Bissell v. L.W.Edison Co., 156 N.W.2d 623, 626
(Mich.Ct.App. Dec. 8, 1967)
Impossibility of performance may be classified as original impossibility or
supervening impossibility. The former is impossibility of performance existing
when the contract was entered into, so that the contract was to do something
which from the outset was impossibly; whereas [s]upervening impossibility
is that which develops some time after the inception of the contract.
Bissell v. L.W.Edison Co., 156 N.W.2d 623, 626 (Mich.Ct.App. Dec. 8, 1967) (citation
omitted). See also Alliant Tax Credit Fund 31-a, Ltd. v. Taylor 8 Assoc., LLC, 08-12938,
2009 WL 691900 (E.D.Mich. Mar. 12, 2009) (Battani, J.) (recognizing, under Michigan law,
that a “promisor’s liability may be extinguished in the event his or her contractual promise
becomes objectively impossible to perform.”). The Bissel court quoted the following:
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the essence of the modern defense of impossibility is that the promised
performance was at the making of the contract, or thereafter became,
impracticable owing to some extreme or unreasonable difficulty, expense,
injury, or loss involved, rather than that it is scientifically or actually
impossible[.] The true distinction is not between difficulty and impossibility.
. . . The important question is whether an unanticipated circumstance has
made performance of the promise vitally different from what should
reasonably have been within the contemplation of both parties when they
entered into the contract[.]
Id. (citation omitted).
The Court does not find Liberty’s argument compelling. Again, the Court notes that
there is no evidence from the Posen litigation expressly determined that Dearborn was at
fault for the water in the caisson. Liberty also has not supported its argument that a party
can use a possible claim preclusion defense as an impossibility defense. The Court finds
that Liberty has not created an issue of fact as to this defense, the Court grants Dearborn’s
motion with respect to this argument.
6. Summary judgment is not appropriate on Dearborn’s damages request
Dearborn requests various amounts for damages. (Dearborn’s Mot. at 25.) Dearborn
states that CDM has calculated the that the cost of completing the caisson as designed is
$30,450,000. (Id., Ex. 17, Revised Basis of Design, Appendix B-3.) Dearborn states that
there remains only $11,543,292.56 unspent on Contract 2. (Id.) Given that unspent
amount, Dearborn maintains that Liberty must pay $18,906,707.44 to complete the caisson.
In its reply, Dearborn provides another, updated damages request. (Dearborn’s Reply at
7.) Dearborn states that it is entitled to $28,250,000.00 to complete Contract 2 and
therefore requests $16,706,707.44 to complete Contract 2 (after subtracting the amount
still unspent on Contract 2.). (Id.)
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Dearborn also states that the performance bond entitles it to liquidated damages.
(Dearborn’s Mot. at 26, Performance Bond. ¶ 6.03.) The performance bond addresses
liquidated damages:
After Owner has terminated Contractor’s right to complete the Contract, and
if Surety elects to act under Paragraph 4.1, 4.2, or 4.3 above, then the
responsibilities of Surety to Owner shall not be greater than those of
Contractor under the Contract, and the responsibilities of Owner to Surety
shall not be greater than those of Owner under the Contract. To a limit of the
amount of the Bond, but subject to commitment by Owner of the Balance of
the Contract Price to mitigation of costs and damages on the Contract,
Surety is obligated without duplication for:
[]
6.3
Liquidated damages, or if no liquidated damages are specified in the
Contract, actual damages caused by delayed performance or nonperformance of Contractor.
(Performance Bond ¶ 6.03.)
Dearborn states that, pursuant to its agreement with Posen, it is entitled to $2,500.00
per day in liquidated damages from the date Posen was to have substantially completed
the caisson to the date when the caisson is finished. (Dearborn’s Mot. at 26, Form
Agreement, Art. 4.03A.) Dearborn calculates the liquidated damages time period as 1,889
days, therefore Liberty owes $4,722,500.00. (Id.)
Dearborn also argues that it is entitled to interest under Michigan’s Unfair and
Prohibited Trade Practices and Frauds Act. (Dearborn’s Mot. at 26.)
Liberty contests Dearborn’s damages. (Liberty’s Resp. at 32.) Liberty first states that
Dearborn has calculated the $30 million dollar damages amount from the revised basis of
design in 2010. (Id.) Liberty, though, points to a more updated, 2013 CDM estimate
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showing that completing Contract 2 as contemplated would be $25,200,000.00. (Id. at 32,
Ex. S.)
Liberty also contests the $25 million calculation, stating that that calculation includes
ground freezing, which NTH had claimed was unnecessary to complete Contract 2 as
contemplated. (Liberty’s Resp. at 33, citing Liberty’s Mot., Ex. J, Murray Dep at 113.)
Liberty also challenges Dearborn’s request for liquidated damages. (Liberty’s Resp.
at 33.) Liberty argues that Dearborn asserted liquidated damages as an affirmative
defense in the Posen litigation and that Dearborn cannot now request the damages. (Id.)
Liberty finally challenges Dearborn’s request for interest under the Uniform Trade
Practices Act. (Liberty’s Resp. at 33.)
The Court agrees, in part, with Liberty’s arguments. The Court finds that issues of
facts exist as to the underlying liability in this case and whether damages are appropriate
at all, so the Court finds that adjudicating an amount owning is premature. The Court also
finds that Liberty has created a genuine issue of fact as to what amount of damages would
be appropriate and by what means Contract 2 could be completed.
The Court declines, though, to foreclose liquidated damages based on the argument
that the Posen litigation precludes them. As the Court has discussed above, the Court
does not know what actual issues the parties litigated in the prior suit. Dearborn can make
the argument that it is entitled to liquidated damages.
As for interest under the Uniform Trade Practices Act, the Court finds that Dearborn
will be entitled to interest under the Act if Dearborn is entitled to damages. Liberty argues
that Dearborn is not entitled to interest because this dispute is “reasonably in dispute.”
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Michigan Compiled Law § 500.2006 governs timely payment of benefits to an insured.
Section one states that [f]ailure to pay claims on a timely basis or to pay interest on claims
as provided in subsection (4) is an unfair trade practice unless the claim is reasonably in
dispute.” Mich.Comp.Laws § 500.2006(1).
Michigan case law, though, expressly allows first party claimants, such as Dearborn
to receive interest even if the claim is reasonably in dispute. See Hastings Mut. Ins. Co.
v. Mosher Dolan Cataldo & Kelly, Inc., 296791, 2013 WL 1149790, at *17 (Feb. 14, 2013)
(“Michigan case law has reinforced this distinction [between third-party and first-party
claimants] and emphasized that first party insurance claimants need not demonstrate that
the claim was “not reasonably in dispute” in order to recover the 12% interest.”) (insertions
in Hastings, citations omitted). Dearborn will be entitled to interest if it succeeds on its
claim and receives an award of damages.
IV.
Conclusion
For the above-stated reasons, the Court DENIES Liberty’s motion for summary
judgment and GRANTS in PART and DENIES in PART Dearborn’s motion for summary
judgment.
So ordered.
s/Nancy G. Edmunds
Nancy G. Edmunds
United States District Judge
Dated: December 3, 2013
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I hereby certify that a copy of the foregoing document was served upon counsel of record
on December 3, 2013, by electronic and/or ordinary mail.
s/Johnetta M. Curry-Williams
Case Manager
Acting in the Absence of Carol A. Hemeyer
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